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Apr 16, 2012, 03.39 PM IST
Sajjid Chinoy of JPMorgan is gunning for rate cut from the Reserve Bank of India (RBI), a first in almost three years on Tuesday, in a bid to revive economic growth as India's headline inflation eased marginally in March helped by a softening in prices of manufactured goods.
Sajjid Chinoy of JPMorgan is gunning for a rate cut from the Reserve Bank of India (RBI) on Tuesday, which will be a first in almost three years, in a bid to revive economic growth as India's headline inflation eased marginally in March helped by a softening in prices of manufactured goods.
"There are enough (cues) for a rate cut tomorrow, but I suspect this will also be the only rate cut for 2012," he told CNBC-TV18 in an interview.
The wholesale price index (WPI), India's main inflation indicator, rose an annual 6.89% in March , higher than 6.70% rise estimated by analysts. Wholesale prices rose 6.95% in February.
The central bank's nearly two-year long battle against high inflation, coupled with a political logjam in New Delhi and an uncertain global economy, has slowed down India's economic growth. The growth probably faltered to a three-year low of 6.9% in the 2011-12 fiscal year that ended on March 31.
Manufacturing goods inflation - a barometer for demand-driven price pressures - dropped to 4.87% from 5.75% in February.
Financial markets, which are betting on a rate cut on Tuesday, shrugged off the data.
“We have seen this movie before where for one-two months core comes down in the momentum falls, but unless the pipeline price pressures abate, core numbers will go act. The inflation number will have a nasty surprise two months from now,” Chinoy said.
The spike in food prices and suppressed fuel inflation are likely to temper the quantum of rate cuts for the year. Food prices rose 9.94% on year in March compared with a 6.07% rise in the previous month, while fuel inflation eased to 10.41% from 12.83% in February.
Even without a diesel price hike next month, Chinoy expects the headline rate goes towards 7.5% for March FY13. “This is assuming the currency stays in the 50-51 per dollar range, crude stays at about USD 120-125 per barrel and global commodity stay where they are,” he explained.
India's industrial production rose less than expected in February while January numbers were revised sharply downwards indicating the USD 1.6-trillion economy was struggling to gain momentum.
According to Samiran Chakrabarty of Standard Chartered Bank, if economy is in a slowdown mode for a pretty long period of time, then there would be some reduction in price pressures. However, he added, this quarter probably would be the best quarter in terms of headline inflation numbers and possibly from then on it will start moving up.
India's economic growth slowed to 6.1% in the three months to December. The government has forecast growth in the fiscal year that ended on March 31 to dip below 7% for the first time in three years.
Even though it may seem that way, the slowdown is not because of the RBI's high interest rate regime, points out Chinoy.
"I think those (problems) go back to land acquisition, policy clearances and regulatory uncertainty. All of the slowdown pre-dates the aggressive rate hikes of 2011. I don't believe 25 basis points cut is going to be materially. I don't think it is going to transmit to market rate soon just given that we don’t think liquidity is going to be surplus over the next few months," he believed.
"So deficit liquidity will also increase the transmission of a policy rate cut into market rate cuts and if it does transmit to market rate cuts, I don’t think that is going to be the straw that breaks the camel’s back, in terms of jump starting investment," he explained.
Lastly, in terms of CRR, given where liquidity is at the moment and will likely be over the next month or two, RBI is mostly likely to hold back on a CRR cut for now and leave that gun powder for later when the liquidity tightens very sharply again because currency in circulation will go up in the month of May and June.
India's heavy dependence on imported crude makes it vulnerable to the vagaries of the oil market. Even as a soaring fuel subsidy bill is bleeding its finances, political compulsions have desisted the government from raising pump prices.
New Delhi risks a further erosion of fiscal credibility if it continues to delay a decision on raising fuel prices. But any increase in prices could accelerate inflation, which in turn could have a bearing on the central bank's monetary policy.
Monsoon rains, critical for India's farm sector, have the potential of upsetting all inflation projections. Normal rains this summer should help rein in food prices. Failure of monsoon rains in 2009 resulted in India's one-and-a-half year of struggle with high food inflation.
All in all, Chakrabarty said, just doing a 25 basis point rate cut does not do good to anybody--either the market rates or the lending or deposit rates--nothing will change if it is just a 25 basis point rate cut. So in effect, the monetary policy will not have any transmission through the system and in that sense it will neither be promoting growth nor it will be anti inflationary.
"I will go with a 50 to 75 basis point of rate cut over a three to four month period," he said.
(With inputs from Reuters)
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